Hedge Fund Manager Calls for $20 Barrel of Oil

, While not exactly a Tech/Media headline, this does have implications for both enterprise and consumer spending, which impacts all stocks. Asset Manager Jacques Mechelany thinks that the price of oil will drop to as low as $20 a barrel in 2009 as U.S. demand outstrips China’s rising demand for oil. Early on he predicted oil would drop to $50 a barrel and it is now below this figure. He believes that $35 a barrel is the long-term equilibrium price for oil but prices tend to overshoot on the upside and on the downside. Implicit in his analysis is that U.S. business activity will not pick up in 2009, because if it does, then oil prices will head back up. Also, he mentions China but makes no mention of India, which is also seeing increased demand for oil.

From Reuters
ZURICH, Switzerland (Reuters)Crude oil prices could fall as low as $20 a barrel in 2009 as falling U.S. demand outstrips Chinese growth, asset manager Jacques Mechelany told Reuters this week.
Having already profited handsomely from the steep decline in crude prices, Mr. Mechelany said he intends to continue to take short positions in crude oil futures and selected oil-related stocks.
The forecast may seem excessively bearish, but Mr. Mechelany is used to sticking his neck out. His $50 per barrel target for 2008 must have seemed equally ambitious in early July 2008, when oil prices were peaking at almost three times that level.
"Prices tend to overshoot both on the upside and on the downside. In the context of the latest movement $20 is only one standard deviation from $35, which I consider to be the long-term equilibrium price," said Mr. Mechelany.
He based his estimate of the long-term fair value of crude on long-term supply and demand trends. However, he said, prices may fall below fair value for a period.
"When oil prices begin falling leveraged investors have to unwind positions, further depressing prices," he said.
Mr. Mechelany's company was previously known as Heritage Fund Management, a joint venture founded in 2006 between Mechelany and Geneva-based private bank Heritage Bank. Bank of China bought 30% of Heritage in July Previous HedgeWorld Story, raising its stake to 70% on Nov. 20 after receiving approval from the Swiss Federal Banking Commission.
Mr. Mechelany holds the remaining 30% of the entity, which has been re-branded Bank of China (Suisse).
Crude oil was trading at $70 per barrel and the asset management company was still known under its old moniker in mid-2007 when Mr. Mechelany began taking short exposure to crude. The price of a barrel of oil continued to rise to a maximum of $147.27 on July 8, 2008, provoking losses to the short futures positions held by Mr. Mechelany's funds. However, the funds continued to maintain short exposure to oil, and have reaped rewards since July, although Mr. Mechelany would not say exactly how much his company has earned on the trades.
He uses a number of macro-economic factors to back up his oil price thesis. For instance, oil consumption in the United States, the world's biggest consumer, has fallen 8% from its peak, he said, and China would not take up the slack any time soon.
"Chinese oil consumption is much lower than in the U.S., and has never grown at more than 8% per annum. To the middle of this year some firms vastly exaggerated China's consumption growth, feeding speculation on oil prices," he said.
Mr. Mechelany maintained the commodities bubble that burst earlier this year was an accident waiting to happen, and that it was fuelled by upbeat research reports and overactive trading desks.
"The whole speculation in commodities has been driven by a few houses who have been trading their books at the same time," said Mr. Mechelany. "Some of them have made vast profits while the clients they were advising have racked up losses. You'd need to look at their books to see whether their trades were consistent with their research reports."
Not everything has gone Mr. Mechelany's way this year. Although his oil bets and a strong conviction trade on a rising dollar have boosted his fund returns, he has also taken some hits. The 788 China and 788 Japan funds, sub-advised by Mr. Mechelany's company, have lost heavily this year after taking leveraged exposure to equities. Both funds were among the best-performing hedge funds in their categories in 2007.
So far, 2008 has been a different story. Some clients said the China fund was down as much as 95% at end-October, while the 788 funds website says the Japan fund lost 66.6% in October alone.
"We expected that once China and Japan had fallen 40% from their peak, valuations would be in tune with the fundamentals. The tsunami of deleveraging has effectively prevented this," Mr. Mechelany told Reuters.
By Martin de Sa'Pinto
Martin.deSaPinto@ThomsonReuters.com